Intensity and mix are everything

A discussion about coffee led Bruce Annabel and Mal Scrymgeour to think about product ranging in pharmacy and the lessons that could be learned from a good barista

We both enjoy a good coffee. To us, the creation of a great cup of barista-made coffee is a mystery; an indecipherable mix of science and art. Indeed, and much to our surprise, we recently learnt that coffee isn’t made from coffee beans as we had thought. Rather coffee seeds are the correct name for what we think of as coffee beans.

The original coffee plant was found in the mountains of Yemen around 1500. It was exported to the rest of the world through the port of Mocha, in Yemen. It’s a name you might be familiar with, but in the context of coffee as opposed to a port city. Over the years, coffee has been exported to and grown in Africa, South America, India, the Caribbean and Indonesia (Java). It’s so popular now that it has become part of our way of life.

In a mildly bizarre twist, coffee started us thinking about the topic of range intensity and product mix. For many, managing product ranges seems just like barista-made coffee—it’s either a mystery or a combination of art and science. You might be familiar with some of the names and terms used in merchandise management, but not necessarily much more detail.

You can settle back and enjoy a coffee while we give you our top 10 ways to maximise your product ranging:

1. Decide how much you need

Too little of a good thing will disappoint, while too much spoils the enjoyment.

  1. Set dispensary stock level investment by the number of stock turns determined by the number of times you sell all the stock each year. (The maths is: dispensary Cost of Goods divided by average stock holdings at cost). Out of interest, Pitcher Pharmacy Services (PPS) clients turn over their dispensary stock 22 times per annum, i.e. once every 2 weeks and 3 days. This is a reflection of efficient ordering and storage capacity. A stock turn 12 times per annum often means excessive stock occupying space that could be used for alternative purposes (such as S3 and practitioner lines) and the complexity of managing short-dated stock. Getting these commercial realities right beats buying and holding huge stock volumes bought through supplier deal incentives.
  2. Optimal retail stock level investment is measured by ‘stock intensity’, not stock turns. That’s because many owners and managers think higher stock turns is a good thing. It is. Up to a point. If you get it wrong, it almost always results in carrying insufficient stock because it’s easy to cut stock levels through under ordering. This results in lost sales and customers who don’t return.
  3. On the flip side having too much retail stock causes clutter blocking patient sight lines and congestion between gondolas, confuses customers, causes out-dated stock and can result in reduced sales. It’s hard to get right.

The Stock Intensity (SI) formula is: retail stock at cost divided by retail floor space m2. SI for traditional community pharmacies falls in a range of $1,000/m2 plus or minus $100/m2. Your product mix plays a huge part in SI. For example, high levels of expense items like cosmetics can lift these numbers by as much as 40%.

shopping pharmacy shelf selection

2. Decide what mix suits you

Write down your pharmacy’s merchandise strategy and how it fits with your purpose, pharmacist professional service culture, premises, service/services and marketing.

Investing the right amount of money in the right merchandise is critically important after setting the SI, or stock weight, first. The mix will vary depending on the purpose of the business. You can see that this is also banner group dependent and may cause conflicts.

Hard discounters such as Chemist Warehouse carry a huge range of stock across many health and beauty departments to make the metrics and strategy work. Their purpose is to maximise basket size aimed at a purpose of saving their customers the most amount of money possible.

At the opposite end of the spectrum, traditional community pharmacies competing through offering patient health solutions carry deep ranges within limited medicine/health departments and little, if any, sundries. The conclusion is that both styles of pharmacies use range selection for completely different competitive purposes.

If you are stuck in the middle trying to be everything to everyone, then that’s not a great place to live. We suggest removing, or at least rationalising, ranges lost to other channels and competitors and work hard on what patients do want from you.

3. Get ingredients balance right

Dispensary and medicines remain the number one patient traffic generator. Pharmacies that are not hard discounters should allocate 60% of stock and space to signature departments (e.g. medicines, wound care, practitioner lines, vitamins) and health conditions departments (e.g. diabetes, sleep, chronic pain), 25%/30% to the ‘sundry’ health departments (e.g. digestion, eye & lens care, ear care, therapeutic skin/hair, etc) and the balance remaining to basic/convenience lines (e.g. general skin/hair, oral, fem hygiene, etc).

Don’t accept stock that shouldn’t be in the pharmacy and often won’t sell. This stock obscures signature, health condition and sundry health departments. Choose categories on a deliberate competitive strategy mentioned above in point 2. Own your range.

4. Presentation

To be taken seriously as a health destination pharmacies need to look like one. When entering the premises, merchandise range selection and positioning creates an impression of what the pharmacy stands for. Plonking sundry lines such as gifts and trinkets at the front door presents the wrong image. Instead, think about promoting what a pharmacy should stand for, which is health, e.g. seasonal condition solutions, health services, or a service such as sleep disorders. Be proud of your offer. Own it.

5. Never ever run out of stock

You can’t sell thin air! Apart from unavoidable circumstances, never be out of stock. Out-of-stocks are something customers tell their friends; you can be famous for not having what people want! Holding just one item is almost as bad as being out of stock because light stock weight doesn’t convey any confidence in your stock. Always replace gaps, stretch out other stock or, when there’s no alternative, have an apology card.

6. Merchandise family tree

Organise your merchandise family tree based on your competitive position and range selection. Department, category, brand and SKU, although some only run three levels.

Many pharmacies are doing this by blending conditions in to the product categories which focuses all their pharmacy activities on patient health instead of just transacting.

7. Measurement

Key things to measure are:

  • Sales $ and momentum
  • Sales units and momentum
  • GP $ and %
  • Retail stock intensity (SI)
  • Stock turns and stock on hand.
  • Items not sold for six months or longer.
  • GMROS (retail GP$ divided by retail shelf space linear metres occupied)—measure at department level and sometimes category. Impractical to measure at SKU level.
  • GMROI (retail GP$ divided by retail cost of stock investment)—drill all the way down the merchandise tree.
  • If GMROS and GMROI are underperforming drilling down will tell you why.

8. Review, review, review

Department and category reviews: Use the above measures, combined with your strategy and purpose, to constantly review department performance. We’d suggest monthly. A good POS system producing reliable data is critical.

Range reviews: A constant process that also requires understanding the ranges you should have in preference to others or are selling well elsewhere.

9. Shelf management format

Plan-o-grams are far from perfect but they remain the best way to physically manage stock. Planograms more or less sometimes work, but they are better than the alternative—which is usually an ‘I reckon’ or ‘spread it, they’ll never know’ approach.

10. Have an exit policy

Very slow moving, old and/or irrelevant merchandise must be exited as soon as possible. Don’t sit on it hoping for the best because it takes up space and money that could be invested in profitable lines that patients want to buy and aligns better with your strategy.

Pharmacies that follow this guide are growing and earning high margins.

Like a good coffee, first make sure you know what suits you and your patients. Presentation should reflect the range. Then constantly monitor and measure and you’re sure to always have a great brew.

Bruce Annabel is a pharmacy business consultant and Adjutant Professor of Pharmacy Management at QUT. 

Mal Scrymgeour is a retail management consultant and director of Zumo Retail Ltd

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